To have here with us Voya's CEO, Rod Martin, and CEO of Investment Management, Christine Hurtsellers. Just real quickly reflecting on this stock, which is up over 175% since its IPO in 2013. Impressively, their three core businesses, Retirement, Investment Management, and group benefits have performed so well. They've divested of non-core businesses, and at the end of this year, they'll have redeployed over $7 billion of capital. I think the market cap at IPO was under $5 billion. Really exciting stuff. It's a pleasure to have them here with us. I'm going to ask a series of questions that we've gotten input from a number of investors in advance. I'm ready to roll. Let's start with Voya's core segment, Rod, which should account for roughly 60% of earnings pro forma once you divested the life business.
You've guided to a compound annual growth rate now of 1%-4% for retirement earnings, 2018 through 2021. That's recently been revised down from 4%-7% due to lower rates. Where are you thinking this number can go over time?
Andrew, first of all, thank you. It's great for Christine and me to be here. Let me first context it to what we introduced at Investor Day, that was for Voya in aggregate, a 10-plus% EPS growth. There were three components of that. The growth component, which I'll come back to in answering your question, the capital management component, and the enterprise expense savings. We did adjust at the end of 4Q, the retirement guidance down, principally interest rate driven. At the same time, we adjusted the employee benefit business guidance up, and up significantly, and reaffirmed at the end of 4Q our guidance on still 10-plus% growth through the plan cycle of 2020, 2021, and 2022. We in fact accomplished that in 2020.
You're correct, appreciate the comment on with the life transaction, we will have completed the transformation of the from two piece. The from the businesses that we inherited from ING Group to the businesses we've chosen to be in, and retirement is the biggest piece. The why guide down was interest rates, and interest rates, frankly, from the point of Investor Day to when we did that, which were down a little over 100 basis points. Oh, by the way, given where they are now, they're down a little bit further. We think we've got enough latitude in the three levers that we talked about, the guiding up of employee benefits, the progress that we've made on enterprise transformation savings. At the end of 4Q, we said that we are more than $250 million of expense savings. We've announced the life transaction.
We're in the process right where we expected to be of negotiating the TSA, ASA arrangements and the duration and frankly, what that cost is. The balance will be done through the expense savings associated with that. If you think about it, we've stood up with Apollo in the creation of Athene, a brand new company, the creation of Venerable, a brand new company in Venerable, and 300+ employees are now populating that with Resolution in creating a brand new company in Resolution USA, and 400 of our employees are populating that. Part of it will have a much clearer picture by the end of Q1 and a very clear picture by the end of Q2. The balance of that will be done through expense savings associated with the retirement outcome. What have we accomplished with that?
We no longer have VA, we no longer have retail annuity exposure and the interest rate risk associated with that. We no longer have the life business and the mortality exposure. Our general account has gone down. You think about the credit cycle. Our general account has gone down in aggregate by about half, Christine, in total over that period of time. If you think about what we could be facing through a credit cycle, we've been in a very long, benign credit cycle. We think we dramatically improved the risk profile of Voya. The end of the year, as you pointed out, with $900 billion of capital or $900 million of excess capital, where the transaction will produce $1.5 billion. We will have returned, if it's only $1 billion+ in 2020, $7 billion by the end of the year. We think we can do better than that.
At the same time, we're feeding our businesses with the capital they think they need to continue to grow to hit these targets. It was interest rate driven back to the beginning of your question.
On the retirement business.
On the retirement business. We were asked a question last evening in an evening session we had. Even in spite of what's happening this week, and we're not immune to what's happening this week, we still feel we can accomplish the objectives that we set out.
Those objectives being 10-plus percent-
10-plus percent EPS growth rate and frankly, the 180 to 190. I think the notable part of this is when we set that out at Investor Day, that included the life earnings. We're going to sell the life business, return the capital sooner, and we will still accomplish that same run rate by the end of 2021.
Just to clarify a little further, even with this interest rate, the 10-year at 1.3-
We believe so.
Good to hear.
As we speak.
Just as long as you're on those lines, you talked about a $1 billion plus of repurchases in 2020.
Correct.
You've got $900 million in excess capital at year-end 2019, a billion and a half dollar check coming in with respect to the life divestiture targeted at 3Q. Could you elaborate a little on the plus in a billion?
Look, that closes 3Q, so I can't release capital that I don't have before 3Q. What we said is on the billion-plus target this year, think about that ratably. You might expect that we will be smart about market opportunities, and we happen to think the last few days might represent a market opportunity for Voya. We will be smart about those kinds of events. If you look at what's constituted up till now, and now inclusive of the billion, the $7 billion, we've been pretty disciplined, smart repurchases of our stock, and we'll continue to be. There's nothing that's changed in our philosophy about that. We're going to continue to make sure we fuel and feed the businesses the capital they need and return the excess capital in the way and the manner and the philosophy that we've done.
No any acquisitions out there that are getting a deep dive?
Look, we will look at things that are sensible. What we've done, Christine can talk about this, we've added here and there some teams and some capabilities that have helped both in the asset management business and in the retirement business, we will continue to do that. In terms of something substantial, it isn't that we wouldn't look at it, we laid out at Investor Day what we think the criteria is. In broad dimension, that was over a two-year period, it needs to be similar to or equivalent of what buying back our shares are. That's a reasonably high bar. Now, that isn't to say with all of the things that are happening, there couldn't be opportunities that are presented to Voya that we want to look at that we think would be both strategic and additive in that way.
We would look at it with a very disciplined approach financially like we do today in our share buyback and share philosophy, if you will.
Continuing on retirement, two things that kind of crop up a lot. One, the SECURE Act. Two, you see these deals like Wells Fargo's, where companies are selling their record-keeping business, maybe 401(k) business. What do these two areas mean to the outlook for retirement at Voya?
Sure. The SECURE Act is a terrific thing. We were, like all of our peers, very engaged with the ACLI in advocating for this. The other point I'd make is this is going to happen over time. This is going to be a two or three-year process as things are phased in. States have to deal with certain parts of it. From a consumer perspective and helping Americans save and prepare for retirement and bringing better solutions, including e-delivery and other things to smaller companies, this is all a very good outcome, and we are bullish about it, and we think it's additive to what we've already been doing. It's not a 2020 life-changing event. It's a 2020, 2021, 2022.
Over time, we're going to look back and say, "That mattered to Americans and small companies, and it matters to Voya." I think we will be a healthy participant in that. Second part of the question?
The second part is the Wells Fargo life transaction.
Two pieces of this, and we're asked this regularly, as you might expect. One is Wells Fargo put itself for sale. This is a comment about Wells Fargo and just the fact that any company that puts itself for sale, you might imagine that the broker and the consulting community, when that happens, this is before Principal bought the company, they view that as an interesting opportunity. They view that as, I've used the analogy, Christmas in July. This is nothing about Wells Fargo, it's just those plans are going to change. This was prior to when Principal bought them. The brokers use that as a moment to say, "Maybe we should consider an RFP.
Maybe we should look at what other markets." Principal is a fine company, and I'm confident that they will have a healthy amount of that business convert over over time. The real test of this with any company is not just 2020, but what that looks like two and three years from now because it takes a long time for some of these large record-keeping plans to make a decision to move and then a long time to move. Andrew, if the question is have we seen more looks at that business? We have. Are we excited about that? Of course, we are. We're competitive, and I think we'll get a healthy piece of that, and I think others will, and I think Principal will do fine.
Just rounding out that segment, Retirement, $2.1 billion in full service net flows in 2019, up 32% from $1.6 billion in 2018.
Right.
Phenomenal numbers. Where can that go?
Look, one of the things that we love about our Retirement business is something that we refer to as the market of markets. What do we mean by this? We're in the small, mid, large corporate record keeping, K to 12, higher ed, and government. As a comment that happened last evening in a few of the meetings we had today, virtually the entire time Voya's been a public company, we've had a pretty robust equity market, and certainly Voya has been a beneficiary of that, and certainly our competitors similar in that way. What I think hasn't fully revealed itself yet is the resiliency of the markets that we're in through a market cycle. I'm not wishing for a market cycle.
Our folks, Christine can talk about this, happen to think it's going to be shallower and shorter whenever that emerges, but we will have a market cycle. This is where our K to 12 higher ed in government space, we have market-leading positions. Those markets typically grow in a downturn. I think that's going to reveal itself. Will the corporate market areas slow down if we go through a softer patch? Of course, they will. They will for us, and they will for others. They've been growing really rapidly. The sum of the total pieces gives us the confidence we have in what our targets are in return.
Nice. I'm going to shift over to Christine. You've had consolidated net flows in the fourth quarter of $1.5 billion, $2.8 billion in the full year 2019, and that was following net outflows of $1.6 billion in 2018. Christine, do you think we could expect continued momentum throughout 2020 from where you were, and what might make you positive?
Sure, Andrew. As far as what we can see in 2020 is we do have a very strong pipeline of unfunded wins and quite a bit of momentum as well on the retail side of our business. Very strong start to the year, one of the stronger starts in retail than we've seen in a while. Life happens. If everybody in the world goes under the rug and gets nervous because of the coronavirus and where that happens and affects the timing. We all need to be appreciative of that, right?
Sure.
Things can be lumpy. Overall, the fundamental growth trajectory of the business is quite strong. Which is a little bit unusual in asset management today.
Very unusual.
Why is that? It goes on a couple of different things, right? Table stakes for investment management is strong investment performance. When you look at notably our fixed income strategies, we use this metric that we disclose called how many of our assets are outperforming either the peer or the benchmark. For fixed income, it's 97% on a one, a three, a five, a 10-year basis, as well as our private asset classes that we don't disclose because in that-
97?
97% on a one, three, five, and 10-year basis. When we go in and do, say, a pitch for business in fixed income, what's very unusual about what we do is there are a lot of people that'll have one or two centers of excellence, so maybe credit or something. We show these sheets of what we call our information ratio is top decile in almost everything we manage, and our performance is top quartile, so it's a sheet of all green. The story is it's a team approach. Very strong investment performance to leverage there. Very strong in our private markets that we are seeing. How are we winning? Strong investment performance, but also differentiated specialty asset classes in a world where the globe is starved for differentiated yield and income and beta that isn't in the form of an ETF.
We have several strategies that are driving that demand, whether it's commercial real estate. We have a very differentiated mortgage hedge fund that we run. We have a very strong CLO business that continues to grow, and private debt. Also we have a secondary business in private equity that we call Pomona. It has a different brand name. When you think about all those capabilities that I just rattled off there, and that's not an exhaustive list, we're winning on multiple levels.
Are the fees higher in these different specialized asset classes? Where do you think fees could go given those factors?
Yeah. The fees are higher. We like to say there's a little bit more of a moat around the fee castle because it isn't as easy to replicate what we have to offer. We do see fee pressure, or it's very competitive on more of the liquid strategies that we manage. However, when you think notably about fixed income, we have well over 100 investors, and we can drop large fixed income mandates with very healthy margins at competitive rates. We can go up against the giants, win, and it's still very accretive to our ongoing operating margin. As we set forward in Investor Day, our operating margin goal is to be between 30%-32% by the end of 2020. We're confident-
'21.
We're on that journey.
Yeah.
2021. Did I say 2020?
Yeah.
Sorry. 2021.
2021? Okay.
Not a Freudian slip.
Maybe 2020, 2021?
Not a Freudian slip.
No? Okay. I'm thinking 2020. No.
Christine, maybe you could just add on the financial institution capabilities that we've done and the progress you've made there, too.
Thanks, Rod. Another thing, within the U.S., as all of you know, the institutional pile of cash is shrinking. As defined benefit plans are closed, it's going more into DC, and DC markets are defined contribution. A lot of it is passive and passive target date funds. Where we are playing institutionally, what's different is insurance outsourcing. Insurance asset management is a strong organic growth pocket within the U.S. as well as globally. Coming out of our roots, when you think about when you manage insurance assets. They're very complicated. I often define serving an insurance mandate is like running a Rubik's Cube. You know those old little things where you twist it's white and then it's green, and you get all twisted around it?
When you're an insurance company, you've got stat capital, you've got GAAP issues, you've got encumber, and you have to manage turnover, credit risk, on and on and on. Because we've lived and breathed it and delivered real value as part of Voya for the Voya general account and Voya Capital for shareholders, our value proposition really resonates with insurance companies. We have grown that business. We started a dedicated distribution insurance team a little over five years ago, and we've grown that business from eight clients to 40.
That's a.
It's continuing to grow. The nice thing too, with the insurance companies is once you get into the tent, say you sell them commercial real estate, we also have the beauty, they come back and they say, "Oh, okay, I want to hear more about Pomona." The cross-sell opportunities there are strong as well.
Lastly, I want to round out that 30%-32% margin that you just touched on in 2021. Is that something, given the higher fees in some of these businesses, is that something you think you could see several years out being a company that can maintain margins instead of feel the heat over a five, 10 year, maybe not 10, five years out?
Yes. 30, 32 isn't a stopping spot. It's just a spot on the journey and the destination of our company. We continue to grow organically. We continue to figure out what sort of differentiated capabilities are naturally for us to add. I'll give you an example of one that we did, is we have a private credit team that has always done infrastructure debt, and we've been managing private credit with a wonderful team for over 30 years as part of our company. We found a team that specialized in renewable infrastructure private debt, and it's ESG and green and some of these things resonate more and more with clients. We did an organic lift-out. We added the team, and we're now in the process of launching an infrastructure debt fund.
An example we haven't decided to do, but a possibility is we don't manage municipals. Yet, in a world of higher taxes and just given our wholesome fixed income capabilities, that's a natural spot for us to do. Going back, is the margin sustainable, and do we have opportunities? Absolutely. How we strategically think about the business is where is it very logical, either organically or possibly inorganically, to step out and to continue to leverage that brand, which does bring with it higher margins and higher fees.
Great. Shifting over to employee benefits.
Right.
What drove that recently announced, and this was on the 4Q earnings call, earnings CAGR guidance of 11%-14% over the 2018-2021 period, and that's up from the previously guided 7%-10%.
Frankly, the outcomes. If you think about it, we have a fundamental group life and LTD offering. Remind all that are listening that on the long-term disability offering, we have always reinsured 100% of that liability. You have to have a group and LTD offering as kind of a fundamental tenet. We assume the risk on the group life. We insure 100% of the risk on the LTD. What we have focused on over the last five or six years, and we've really come from being a non-top 10 player to a significant player in the voluntary space. What's driven this? There's been two things. There are a couple of things that we've done as a company to solve some pain points and what's driving the opportunity. Last year on the voluntary space, half of the new cover that we added was brand-new coverage in the marketplace.
The reason that's happening is with the advent of high-deductible healthcare, many employees, perhaps many of you, have chosen a higher deductible plan, and it creates gaps that voluntary products in part help offset. There's been an interesting alignment over the last four or five years since this has been happening of employer, employee, and consultant/advisor understanding what these are and adoption of this. We see this, Andrew, in not just the small mid space, but the Fortune 100 space. We added a Fortune 50 company last year who had never had any of this coverage previously. We had a lot of adoption of this in the small mid space. Part of the pain point that we figured out over time to solve, it's not as if we're the only company trying to pursue this, is making it easy at the enrollment part.
You might imagine in all of the companies we do business with, but particularly many of the small-mid payroll and the differences in how they do payroll are massive. Our ability to take data in, My simple word analogy is we take it in a shoebox, and we deliver back a package they're looking for. We've been able to solve that in a way that this doesn't become a problem for the employer, it becomes part of the solution. That cover has been growing very rapidly, and we see that continuing. We've had some really good experience with stop loss. We measured that by loss ratio, as you know. We've had a couple of periods of time that gets repriced annually that we got modestly out of our loss ratio range. We're able to reprice and get it back in.
Our focus is on profit, not top-line sales. Driven by the loss ratio. The combination of those things, we're bullish about it. We raised the guidance, and we think that's an interesting trend, different than perhaps many in the market, and part of what reinforces our comfort and our confidence in the aggregate 10-plus% EPS growth rate.
Interesting. Rod, I started off by, when I introduced you, just highlighting the stock price appreciation of well over 100%. It was over 180% about a week or so ago, but it's still above 170%, That's phenomenal. It's unparalleled. Your contract extends through 2021 with an option through 2022. How long would you like to remain with the company? We'd love to see another 175% return in the stock.
Everything that we've always talked about has been a team sport. Look, particularly when things are going well, the light might shine on me a little bit more than it probably should, but we've built a tremendous team, and you're seeing Christine today, and you've met Charlie previously, and you certainly know Mike Smith and Michael Katz and others. What I've committed to, Andrew, is through this plan cycle. The 2019, 2020, 2021 year, no change from the two previous plans. I am as fully engaged with that as possible. We are and have been, and I really want to underscore have been, thoughtfully approaching, thinking about, and working with our key leaders on succession. I don't just mean succession at the CEO level, I'm talking about succession and development.
I want to use Christine as a quick example, and I'll get back to your point. Christine was formerly one of our lead investors and has a phenomenal track record, and transitioned to the CEO of our Investment Management business, is doing a terrific job. Well, we had a ready-now candidate in Matt Toms step in, and we haven't missed a beat. What we really want, and we want to demonstrate to those that own us currently or prospectively, is the depth of the team that we have in every dimension. We are going to be far more purposeful, not just in having Christine and Charlie and Rob Grubka, our business leads, but frankly, some of the men and women that are really key on their teams. We're going to get much more exposure to this.
To answer your question in terms of 2021, naturally, we are dealing with, as a board, succession, and as I shared at a dinner last night, this is not going to be a 5:00 news conference that with immediate effect, I just stepped down. We're going to reveal this in a very thoughtful way as we land that plane in introducing a broader team for the next generation. The reason that option's there is the option's always been there. If the board asks me to stay through 2021 in a chairman capacity or some kind of glide path as I retire-
Through 2021 or 2022.
Through 2022. I'm sorry. Through 2022. Certainly, that would be open to consideration. I do think there's a time when the baton needs to be passed, not because I'm not excited about what we're doing, but just we need to create opportunities for not just my immediate direct reports, but for their direct reports as this goes on, and we're very mindful of that as a board. I've been here eight and a half years. I'm having a ball. I'm proud as heck of the results, which have been a team effort. Our board is proud of the results. The most important thing right now that we're working on, you might find this interesting, we're closer to our next Investor Day than we were to when we started the ideation for the 2019, 2020, and 2021 period. We're working on that as we speak.
You would expect us to be. We're not revealing anything about that today, but we're working on what does Voya look like for the 3-year plan that follows? What are the investments that we need to make? How do things need to change, if any? Where do we need to add components of teams and so forth? What the board has asked me to do, and you would expect this, is to be as engaged in that as I have been in the 3 previous iterations, phase 1, phase 2, phase 3, and I am, and we are. This is something as a senior leadership team, we talk about regularly, both with the team and with our board as we develop this over the next year and a half. Stay tuned.
I am thrilled to be here, there will be a natural moment, whether it's at the end of 2021 or the end of 2022, to pass the baton and move on.
Interesting. Rod, what are your thoughts on remaining an independent company?
I've tried to be unbelievably consistent, almost to the word on this. We fought like heck to be a public company. We're proud as heck of the results that we've built as a team, it has been a team sport. I've always answered that externally and equally internally, this is really the point I want to drive home. Voya is not for sale. My next sentence, because you're all really good at asking questions, is what happens if someone knocks on the door and it's something that is shareholder enhancing? Will the board act in the appropriate way? My comment, second sentence always has been, I am 100% confident the board fully understands its responsibility and will always act in shareholders' best interest. I think the evidence is $7 billion of shareholder return just in the share buyback since we've been public.
That said, never really proud of what we've done. We've gone from a company, candidly, that no one cared a heck of a lot about or if at all when we went public, to one now that we're being talked about a lot. Kind of heard that the other night on the debate. I'm hearing my name mentioned frequently. We're hearing Voya's name mentioned a bit frequently, and we can't help When comments are made, and candidly, I think they're going to be made more frequently, not less. We deal with it. How we're able to deal with it is we've been answering that same question internally the same way. We're not saying one thing to one audience and something else internally. Our employees know we're answering it the same way, and they've responded beautifully.
Part of why they have is they've seen how we've acted and treated and the value that we've created and the culture that we've built in Voya. The two examples, again, I give, the most recent ones is when we made the decision on CBVA, we stood up Venerable and 300 employees that people have worked with for 10 or 15 years got terrific jobs and have a bright future, and people care about how they're treated. Same thing with Resolution. We did a transaction that we think is a fantastic transaction for our shareholders, and 400 people, plus or minus, are going to have jobs, and they're being stood up as an independent company.
That matters to those 700 people, but it matters even more to the 6,000 people that we have left on how we have treated and have we acted in a way that's consistent with our values and our culture. Andrew, we just did a press release two days ago. We were recognized now for the seventh year we've been eligible and the seventh consecutive year as one of the world's most ethical companies. There's only 128 or 22 globally and only five in our sector. That matters to our clients a lot. The ESG thing matters to our clients.
I want to, maybe we can close out on ESG because it's an area that investors seem to be taking increasingly more seriously. I was just paging through Barron's one weekend, and there's Voya, number one in financial services, and way up at the top relative to any type of corporation. Last night, we were talking about how it's not only the right thing to do ethically, but it's affecting your business. Maybe you and Christine can talk about how it might be affecting sales.
Let me start and let Christine give you some real-life examples of how that's impacting both RFP activity and finals presentations and the kind of Q&A that we get. Again, one of the cool things about 8 and a half years ago was we had the chance to start with a fresh whiteboard on what kind of company did we want to be, and we had an opportunity to build a new brand. We had an opportunity to define the culture that we wanted. An example of that, I'll weave this back to the ESG, we said we wanted to get to parity on our board, men and women, and we did that in 2 and a half years. Then we wanted that to cascade through the organization, that has happened.
ING was a global company, Christine was not, and others, were not unfamiliar with ESG in Europe and ESG in other parts of the world. In my former life at AIG, I certainly had that exposure. We could see this coming, and we spent a good bit of time thinking about how do we define our authentic self and what are the things that we need to do for this to happen. We're proud of the Barron's thing. 3 years ago, Barron's started this, we were 46th. Last year, we were sixth. This year, we're third, the last 2 years, the highest-ranked financial services company. That's not an accident. It's having a huge impact.
Very often when we're meeting with prospective, actually investors, but certainly people buying our products, they're saying you screen at the best or nearly the best of all of your competitors for this. It is very much an active part of both the RFP process and their intentions. With that, I'll hand it to Christine on how does it work in real life.
Yes. Andrew, we are seeing more and more clients asking us about this, not only in terms of the investment process but more broadly. I think there's a term in asset management that you call greenwashing a little bit. Like as our asset managers giving lip service to ESG because it's a thing and maybe they're buying external data. How we compete for business and where it's really differentiated is pointing out to them that ESG is not just environmental-
Right
which we're green, and we've been awarded green. It's governance. It's doing the right thing. We're really the embodiment as far as the overall culture of Voya. In fact, I was at a finals yesterday for a mandate with a public fund, and they were very interested in this topic. What you can do as part of Voya is to say that you are one of the most ethical financial service companies in the world, one of five, that resonates. It's real, and it's intentional. It's hard-fought for the brand. We're very passionate about it. I find when I go in front of these things, I always say we have an authenticity around this as an asset manager few can match. Because we don't just talk about ESG, we are ESG.
Whether it's ask me questions, the board setting at the top, 50% of our board members are women. That sets the tone for the firm. Whether it's various kinds of diversity, doing the right thing, we're ahead of the pack on all those elements. Again, this is a tailwind. In addition to investments in performance and in what we do, I think it's a tailwind for overall Voya in mattering to our clients and winning business.
The other element I'd add, look, we've had a very robust economy, which has been terrific, and a very competitive employment market. This matters a ton to the men and women of this next generation. I mean, we are literally having people join us and stay with us because there's a recognition of the authenticity compared to others that may be less so or not focused on it at all. That's just another outcome. It wasn't something that was on the whiteboard when we started, but it is of that generation in particular, this is just something that, of course, you would do this, and if you're not doing it, why the hell do I want to work for you?
Amazing. Phenomenal company. Thank you both for coming out here and speaking with us.